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Panel Calls for Strict Limits on Local Treasurers

February 17, 1995|ERIC BAILEY | TIMES STAFF WRITER

SACRAMENTO — Saying the Orange County financial debacle demonstrated "reckless abuse" of the public trust, an advisory panel on Thursday recommended the Legislature conduct a wholesale revision of state laws governing municipal treasurers.

Among the proposals by the 12-member group, which is advising a special Senate committee investigating the Orange County bankruptcy, are severe restrictions on borrowing for investment purposes and the use of derivatives.

The advisory panel, which includes business and investment professionals, suggested that local agencies be considered "unsophisticated investors" in dealing with brokers, putting the onus on the investment banking community to ensure investments are prudent. They also called for annual audits of county investment funds, the establishment of three-member review committees to oversee a county's investment decisions and criminal penalties for violations.

"We believe that the Orange County financial collapse . . . resulted from nothing short of a reckless abuse of the public trust," said Eli Broad, the advisory board chairman and chief of SunAmerica Inc., a Los Angeles-based financial service firm. "We do not believe the losses should have occurred or would have occurred if there were appropriate legislation and all parties acted in a responsible manner."

Calling current laws "woefully inadequate," Broad said a complete rewrite of the "patchwork of statutes" governing county treasurers is needed.

The proposals were lauded by legislators. Some of the ideas, however, drew fire from a group representing California county treasurers, who fear the restrictions would severely limit their financial options.

Broad expressed hope that his advisory group's proposals would survive an onslaught by lobbyists.

"There's no question that portions of the investment banking industry will oppose these provisions," Broad said. "They would like business as usual."

Senate President Pro Tem Bill Lockyer (D-Hayward) calling the proposals "good ideas presented by credible people."

Sen. Lucy Killea (I-San Diego), who co-chairs the Senate Special Committee on Local Government Investments, said the private sector panel had provided a "balanced view" that was also "very ambitious in scope."

"No one could criticize these recommendations as ineffective or off the mark or in any way protective of the securities industry," Killea said.

Terry Brennand, lobbyist for the California Assn. of County Treasurers and Tax Collectors, said that "the intent is laudable and probably appropriate, but the individual proposals miss the mark."

"These would only serve to reduce the investment options," Brennand said. "If all treasurers are left with is plain vanilla stuff, it's going to cost money in terms of returns statewide."

Brennand took particular aim at the proposal to form advisory committees overseeing each county's portfolio. He suggested that the idea was pushed by several members of the group who have ties to Wall Street and would stand to gain if counties had to hire experts to staff the three-person advisory committees.

"I don't mean to point fingers at people on the committee, but it has the appearance this is coming from the investment community," Brennand said, adding that the panel is "treating these treasurers as if they're idiots, and that's not an accurate representation. These guys know what they're doing, and if they don't, they don't invest in it."

In contrast, the treasurers association has proposed that county portfolios be reviewed by an advisory panel made up of participants in its investment pool. The group also has suggested the state begin a program to educate local officials on the particulars of municipal finance.

Brennand said that using "broad, sweeping definitions" to virtually outlaw derivatives "just clouds the issues" because those sorts of financial instruments range from high-risk to relatively prudent investments that are appropriate for municipal portfolios.

The proposal would bar the use of derivatives for speculative purposes, but permit them to reduce the risk of other investments.

Brennand also said a virtual prohibition against borrowing--the panel recommended a limit of 10% of assets in most cases--would handcuff county treasurers from taking advantage of low interest rate cycles.

The panel members were appointed by Lockyer, the Senate leader. Among the advisory group members are Orange County developer George Argyros; John H. Sawyer of the Orange County Employees Assn.; Los Angeles attorney Daniel N. Belin; George M. Lintz, a Sherman Oaks investment manager; James W. O'Connor, a Los Angeles investment adviser, and James Z. Pugash, a San Francisco investment adviser.

Although some critics have said that tighter regulations would weaken the marketability of California municipal bonds on Wall Street, panel members took exception. Broad said that tougher laws would only serve to "enhance the attractiveness" of bonds sold by California and its local agencies.

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